There are potential tax code changes that could see taxes increasing for the highest gross income Americans as well as capital gains changes, but the best course is to advise clients to ride it out, blogged Mark Hackett, chief of investment research for Nationwide’s Investment Management Group.
The “Build Back Better” bill proposes to raise taxes by 5% on individuals with an annual income over $10 million and an additional 3% beyond that on anything above $25 million; the surcharge would apply to dividends, capital gains, and wages. The proposed legislation has already passed through the House and is currently in the Senate, where it may have changed made to it or simply not pass.
A recent study from Nationwide found that concern regarding taxes has doubled since 2020 for investors and has tripled for those in higher income brackets (between one and five million dollars) in the same time period.
Historically, Hackett explains that there has been little to no correlation between changes in market returns and capital gains rate adjustments.
“In an analysis by the Tax Foundation, there have been 22 changes to the maximum capital gains tax rate since 1954. In those years when capital gains tax rates changed, the correlation with stock gains was almost indiscernible at 0.004,” he wrote.
Image source: Nationwide’s Blog
As such, the best advice that a financial advisor could give to their client is simply to sit tight and not make any big changes, even if the tax code should change. Changes to things such as the tax rate or capital gains taxes often prompt investors to feel the need to respond within their portfolios in some way, but any changes made could ultimately be counterproductive to the portfolio and add to any market disruptions that might occur around a tax code change announcement.
“Making emotional decisions in portfolios based on tax changes may harm long-term returns,” wrote Hackett, and cautioned that advisors should steer their clients instead towards their long-term goals and plans instead of focusing on any immediate tax changes that most likely will not affect their portfolio.
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